In the wake of the GFC, the Future of Financial Advice (“FOFA”) reforms were implemented by the previous Labour government to increase the trust and confidence of retail investors in the financial advice sector.
Senior Associate Kate Gardner looks at the current position with the reforms.
The FOFA reforms:
These consumer protections have been the subject of much criticism and debate, with arguments that the reforms created unnecessary red tape on industry participants and are too costly to implement. In December 2013, acting on its election commitment to reduce this compliance burden on the financial services industry, the Federal Government announced a further package of changes to FOFA. New legislation to implement this suite of changes to reverse and water down some of the FOFA laws is currently before the Senate.
In the meantime, due to a “need for swift action”, the Government controversially implemented regulations that took effect on 1 July 2014 which mirror many of the Bill’s proposed changes. These interim regulations will be repealed once the new legislation takes effect.
For advisers, the changes mean reduced compliance obligations. The new regulations have removed the opt-in requirement for all clients and it is no longer necessary to send fee disclosure statements to pre 1 July 2013 clients.
While the changes will reduce compliance costs, they do not come without some compromise. The disclosure requirements surrounding Statements of Advice (“SOA”) will be amended, requiring additional information to be set out – essentially information about the client’s rights and the legal obligations owed by the advisers. The SOA must be signed by both the adviser and the client. If after receiving a SOA a client requests further or varied advice, the adviser will have an obligation to document these instructions, have the instructions signed by the client, and then acknowledge receipt of the instructions (although this can take place after the advice is given).
Some positive changes, from the advisers’ point of view, are:
For retail clients, the amendments essentially mean less consumer protection.
Advisers will not need to renew ongoing fee arrangements every 2 years and the onus will fall on investors to cancel arrangements that are no longer required. The risk for investors is that they may continue paying fees indefinitely for advice they are not receiving.
For arrangements entered into before 1 July 2013, advisers will no longer need to provide annual fee disclosure to their clients. The onus will be on clients to seek this information from their adviser.
Retail clients should also be mindful of the concept of scaled advice. While scaled advice arguably was available before the changes took effect, the express recognition of its availability may lead to an increase in advisers offering to provide more specific or targeted advice, as opposed to more holistic advice. Whilst this will undoubtedly provide more affordable access to advice for retail clients, individuals must be conscious that the Best Interest Duty of the adviser will be limited to the scope of the advice agreed upon.
The Senate Committee examining the new legislation has recommended the Bill be passed. However, given the present unpredictability of the Senate, the passage of the new legislation is somewhat uncertain. If the Bill is disallowed in the Senate, then it is likely the regulations will be repealed and FOFA laws will revert to the more stringent requirements for advisers as originally enacted. Time will tell.